Much like the cruel joke Charles de Gaulle reportedly cracked about Brazil – that it’s the country of the future and always will be – predictions of an end to the dollar-based international monetary system seem to belong to a future that will never arrive. Brazil’s embrace of central bank digital currencies (CBDCs) could be the catalyst for a shift away from dollar hegemony. This shift could have profound implications for U.S. capital markets, the global economy, and geopolitical power dynamics. Brazil’s central bank is among more than a hundred experimenting with CBDCs, and other key export economies such as the United Arab Emirates, Russia, Singapore, and China are also exploring the use of digital fiat money.
Rather than direct importer-exporter agreements, economist Zoltan Pozsar sees CBDC-wielding central banks adopting new roles as clearing agents for their country’s exporting and importing firms and then using CBDCs to settle directly with their foreign counterparts. This would reduce global trade-related demand for dollars and, by extension, diminish investment in dollar reserve assets such as U.S. government bonds.
By cryptographically locking an exchange rate forward-contracts into a decentralized, blockchain-based escrow structure could protect an exporter and an importer from currency volatility over the timeframe of their trade deal without either party having to trust the other, or anyone else, to hold the funds, explains Pozsar.
The U.S. should accept the reality of Wall Street banks’ gradual loss of intermediary status and consider how to leverage the advantage it still enjoys as the issuer of a currency desired the world over. Rather than developing a retail CBDC, official digital dollars should be reserved for inter-central bank cross-border settlement while domestic-use digital money should be opened up to private players using decentralized models with crypto technology.